Ecommerce Marketing Budget Calculator | CAC | ROAS | And More

So today we're going to talk about how to understand whether or not you have good marketing strategies, and understand how to budget for marketing once you figure out where you're at with that.

0:37

So the first thing I want to talk about is, let's talk about a list of things you're going to need to know in order to make these determinations about marketing, and where to find them.

So first of all, you're going to understand your cost of goods sold and your fulfillment costs. Second of all, you're going to have to understand the overhead cost of your business.

Next we start getting into some marketing metrics. CAC stands for customer acquisition cost, and in order to get that you're going to need to know your number of daily sales and the amount that was spent on advertising expenses.

Then you're going to need to know your ROAS, which stands for return on ad spend. This is also a marketing metric, and in order to know that you need to know your average order size, on top of some of the other things we've already talked about.

And last, you need to know any other cost of sales. So this would be things like marketing agency fees, any sort of peripheral things like that.

1:28 Finding your costs on the P&L

So first of all let's talk about how we go about getting this.

So the first thing we talked about that you would need to know is your cost of goods sold and your fulfillment cost. So this is a profit and loss statement. This statement comes directly out of your QuickBooks or whatever accounting software you run. It shows it over a period of time, and basically what it tells you is exactly how well your business performed. You have your income here at the top, then you have all of your cost of goods sold, and then you have everything underneath it.

And the end result of this is a net income. A positive net income means your business is making money and you're succeeding, and a negative net income means your business is burning money and you're heading for bankruptcy if something doesn't change. So positive net income here is really what we're ultimately shooting for. So how do we get a positive net income, and how do we operate our business to help make that happen?

2:16

So first of all I want to make you guys aware of the relationship here between income and cost of goods sold. So income minus cost of goods sold equals gross profit. Everything that falls below that is overhead.

So one of the key numbers I said you needed to know was the overhead of your business. So when I talk about the overhead of your business, I'm talking about everything that's over and above this gross profit, or rather I should say under and below your gross profit margin line here, and then your net income.

So when we talk about cost of goods sold and fulfillment costs, if everything here is overhead, this one's pretty easy to identify, you just come down here to total expenses on your P&L. But this stuff above the line, this income and this cost of goods sold, this can be a little bit trickier to really identify. And so let's talk about how to get that.

3:08

So first of all, when we talk about cost of goods sold, I'm really talking about total product costs. And what that means is, your cost of goods sold is actually the cost of your product, how much you spent for it, how much your packaging was, how much you paid to assemble it.

Fulfillment cost is all the cost of actually having that, so it's the warehousing, the shipping, the packaging. And then you have your selling cost. This would be things like ad spend, commissions, marketing channel fees.

So all of these are necessary, required costs of doing business. All overhead costs you can kind of argue are not necessarily necessary. For example, you can run a business without having payroll, you can run a business without having utilities, you can run a business without having travel expenses. But you really can't sell a product if you don't have a product to sell. And if you're running an ecommerce business you really can't sell that product without having shipping costs associated with that. You have to hold your product somewhere, unless you're a drop shipper.

And when it comes to selling your product, you have to have created market demand somewhere somehow. You're either spending money on ads, you either have word of mouth going on, or you have Facebook groups or Instagram groups that you post to. But somewhere along the way you are building an audience somehow, and there are usually costs associated with that.

So all of these are all things that I consider product costs, and these are all important things to understand on top of the overhead as you go about making decisions about how much to budget.

4:42 Calculating CAC and ROAS

So why is that true? Well, we'll talk about it in just a minute about how all the pieces come together. But first of all, let's talk about how to calculate these marketing metrics we're talking about.

The first one I want to talk about is customer acquisition cost. So the question here is, how much does it cost for me to get each individual customer that walks in my door?

So the way this is calculated is you look at your total marketing expense divided by how many new customers you have. So for example, if I spent fifty seven dollars on ads and I made four sales that day as a result of those ads, then my customer acquisition cost would be 57 divided by 4, so 14.25 spent for each individual new sale that I made. So each customer cost me 14.25 to get in the door. So that's customer acquisition cost.

5:27

And this can be as complex or as simple as you want it to be. Sometimes CAC can be a little bit tricky to calculate because it's hard to see a direct correlation between what was actually spent in marketing and the number of new sales that came from that. For example, if you're running ad campaigns over an extended period of time, then some of your customers are repeat customers, therefore, like, was that from ads that were spent a month ago. Totally understand that there's some of those complexities. But for the sake of this, I'm just going to simply say it's what you spent in marketing divided by how many new customers you got as a result of that.

6:04

So the next thing you need to be able to calculate is ROAS, return on ad spend. So ROAS equals your average sale value divided by your CAC.

So when I say sale value, I'm talking about the gross amount of the sale. Obviously there's also things to consider like the lifetime value of a customer, which would also consider things like your costs associated with the sale. But because the calculator that I'm going to give you guys calculates all that in, we're going to keep this really simple and we're going to call return on ad spend simply your average sale dollar amount divided by your CAC.

So if my average sale is 87, for every customer that checks out through my website or through Amazon they pay eighty seven dollars in orders, and my CAC that I calculated from the previous slide was fourteen dollars and twenty five cents, then my ROAS is eighty seven divided by fourteen dollars and twenty five cents, which is six dollars and ten cents. So what this means is that for every dollar I spend on marketing I make back six dollars and 10 cents on sales.

7:20 Setting up the calculator

So let's assume that these are my numbers, and let's talk about how to use the calculator now that I provided for you guys, which should really answer the question of, how much should I spend for sales.

So let's look at this calculator. This is the calculator that I've created. After you download this you can adapt it and adjust it however you want to. This is just a beginning template to get you started.

So everything up here in gray are variables that you can put in. The cells in gray are the only ones that you should mess with or change in any way. Everything else is a calculation that should be left alone, unless you add something in that is a calculation. But I would recommend leaving this entire box here, calculations, and this entire part here, calculations, and just changing the gray.

8:00

So this is how it works. We talked about your cost of goods sold and your gross profit margin. So if we go back and we look at the slide right here where we talk about cost of goods sold and gross profit margin really quick.

In this slide here you can see, in the simplest sense possible, if I have income of a hundred thousand dollars and I have cost of goods sold of forty thousand dollars, then my cost of goods sold margin on this is forty percent. So I spend forty percent of my sales on cost of goods sold and I have a 60% gross profit margin. So that's information that comes directly off your financials.

So in this case let's change the numbers to what that says. So if I have 40% COGS, this gross profit margin cell will automatically calculate after you put in your COGS. In fact I should probably make that blue so people know not to change it. So input this, this will calculate automatically.

This overhead amount, how much am I making in overhead, comes directly off of your financial statements also. So here we talked about how, if this is your profit and loss, everything below this gross profit line is your overhead. So in this case my overhead is fifty eight thousand three hundred fifty dollars, so I'm just going to put fifty eight thousand in here.

9:14

Okay, so then a couple of other things that we're just making assumptions about. Since this is designed to be a daily calculator for daily ad spend, in this situation I'm assuming a scenario like you're working with an ad agency, and they not only have a flat rate, so this is their monthly flat rate, but then they also charge a percentage of sales over and above their flat rate. So in this case let's say that seven percent, input whatever that is. And then this gives me the number of days per month, so depending on if it's February, January, June, whatever, how many days are in this month that we're looking at right now.

9:53 Returns and discounts

Then, because returns are a pretty big deal obviously, and it's something that needs to be factored in when you're considering return on marketing and stuff like that, this gives you an idea of your daily return value. So one of the reasons why we recommend that people break out their financial information in a way that lets them see that is because of this exact thing. It's very important to be able to see that.

So this is an example of what this data looks like when it's all combined, income with cost of goods sold. And this is what it would look like if you had it broken out in a way that gave better visibility into this. And this is the way that we break out this data for our clients. We don't just look at an overall sales amount, we look at it in detail, so we can see what our Amazon refunds are, what our sales were, what our discounts were, all of this sort of stuff, which then allows us to calculate these percentages.

10:48

So from the financials, usually what we would recommend with someone calculating this is to look at a trend over time and see kind of what your average returns are. Specifically because discounts you have a little bit more control over, but just look and see what your average return is over time.

Also, this is the way we recommend breaking out cost of goods sold, in a way that lets you see the impact. You want to be able to see your product costs, like here, Amazon, Shopify, what are my actual product costs. This will actually also help you get really good cost of goods sold numbers, but then also what's being actually paid in fulfillment related costs.

So in the example of this spreadsheet we have all of that COGS related stuff basically summarized into here, because when you're looking at financials it's a lot easier to just say cost of goods sold as a percentage of income to get all of this than it is to try to break it out individually. But when it comes to returns and discounts, we do recommend inputting in actually a trend that you guys are seeing.

11:52

So let's say in this case we had just over four percent on returns. In fact, let's make that easier, let's say six percent on returns.

And then, so if I'm thinking about using this calculator and I'm trying to figure out what I want to do, let's say that I play with this discount. Or maybe I'm giving people free shipping, or maybe I'm offering them a discount on a certain date in order, or maybe one of my ads that I'm running is running discounts as part of that. You can change this to whatever you want.

So this is set up to have what you call, not static, what's the opposite of static, I can't remember. But basically each one of these cells will calculate and recalculate based on whatever you have here. So you see here where we have discounts here, if I put in a 25 here instead, you see this number changes, and therefore everything on the way down changes as well.

12:43 Reading the daily P&L

So what this allows you to do now is it allows you to run what-if analyses on all of this. So if you have your agency fees, your Shopify returns, your ROAS that you've calculated, this is where you can say, all right, what do I want to put in as my daily ad spend. And then this is your agency fee that you're paying, and then this is other fixed marketing expenses that you have. So if you have an email subscription that you're running or anything like that.

And then this becomes a daily profit and loss. So the way this works is we have our sales, our returns, our discounts, net sales, cost of goods sold, gross profit margin. So this is the top part of your financials. Then I have your cost of marketing broken out into what I consider variable costs and then fixed costs for the month. And then you have your overhead.

13:33

So here we have what we decide to spend that day in ad spend, what it's going to cost us in agency fee for that day's ads, giving us total variable marketing. Contribution margin is something that's not factoring into any of these calculations. This is a number that's important. It's a little beyond the scope of this video right now, I'm not going to talk about this right now, but you can Google contribution margin to see what this is.

But then below that we have our fixed cost of marketing. So this is your management fee of two thousand dollars broken out according to how many days of the month there are. Then your email, your other fixed marketing costs, broken out according to that day. And then it gives you total fixed advertising costs.

This is your total return on marketing, so this means that after all of your sales and after your marketing expense this is what you have left over. And then this is your daily overhead burden. So if you have a monthly overhead of 58,000, then the daily burden of that is 1,900 a day, which shows you each day whether you're ahead or behind. So as long as this number is positive you're making money, and if this number goes negative you're now losing money. And assuming that this situation held true all month long, this would be your monthly net income, and this would be your monthly ad budget.

14:56 What-if scenarios and scaling

So let me show you kind of how this works, and why it's kind of an important thing to play with.

So watch this net income number. This is really what we're watching, is whether this is positive or negative. So right now we have a 5.51 return on ad spend, so that's pretty good. So what if this dropped down to two dollars, what would happen then? So if this dropped down, you see we're now in a loss position, our net income number is now a loss.

So what can we do to change that, if our return on ad spend suddenly drops down? What are our options? Well, first of all, if we spend more, let's see what happens if we spend more. If we go up to eight thousand dollars in ad spend, then this goes positive.

15:40

Well, why? It's because we make a lot less on our ad spend now, and so if we're not spending as much our sales are going to drop significantly, but our daily overhead costs stay exactly the same. So no matter what happens with how much you're spending each day on ads, your daily overhead stays exactly the same, and so does your fixed overhead cost. So you have this number that you have to overcome in sales before you're even ahead.

So let's say though that this goes back up, this is six dollars, and so we drop this back down and let's say we're only spending 1,500 a day on ad spend. But now, because let's say that in order to get these we had to offer much higher discounts, so now we're offering a 40% off discount, you can see now we're in a loss position again, because now we're making significantly less on the sale than we were before because of discounts.

16:33

So let's say this goes back now to, let's say we drop this to 10% ad spend discounts given. Now we're doing really good again.

But now maybe something happens with our product, like our product's been sitting in a warehouse for a really long time and so the fulfillment costs of that product are getting higher and higher and higher. And so now our cost of goods sold, instead of being 40%, actually goes up to 60%. So we're still in a positive position, that's great.

But what if not only does our margin slip, but now we also lose some ground on our ROAS. Oh, five dollars wasn't quite enough to do it. Let's see if it drops to four dollars, what happens. At four dollars we become negative on our net income.

17:33

So you see there's a lot of different factors that play into the question of, how much should I spend on ad spend.

Really, if you can get your metrics in a way that it becomes a positively impactful scenario, it really is in your best interest to pump money into marketing, as long as the metrics support that.

So let me show you what I mean. In general, let's say that we are fairly comfortable with the 40% cost of goods sold, we decide to give a 10% discount. Our Shopify returns, we feel like if our ad spend was to go way up we would go up to eight percent. Maybe in order to do all of this we've had to increase our overhead to sixty thousand dollars. But still with this scenario, four dollar ROAS, we are still net positive. So nine hundred eight dollars per day given all of these situations.

18:10

So now, if we're 908 dollars per day and our net income becomes twenty seven thousand dollars, what if we double our ad spend? Three thousand dollars, double our ad spend. Now we're at a hundred and seventeen thousand dollars a month in net income, and thirty nine hundred dollars a day in daily net income, by bumping up our ad spend. And if we were to bump this up again, six thousand, now we're really killing it. Now we have dialed in a profitable model and we're now rinse and repeat and scaling this up.

Now the trick is, as you put significantly more money into ad spend, sometimes all of these costs don't behave exactly the same. For example, your ROAS may slip, you may find yourself having more returns, you may find yourself having to expedite your product and so you lose some margin on cost of goods sold. And so this is kind of something that needs to be tweaked on a regular basis and watched, in order to make sure that whatever model you're scaling is a profitable model and not one that slipped into unprofitability and you didn't notice.

19:11

Because watch what happens if I suddenly have to expedite this order, and if I suddenly find myself having to expedite inventory because my sales bumped up so fast, and this suddenly went to say like 75% cost of goods sold. Now I'm making significantly less money, and if my ROAS slips at all. Well, that didn't quite do it, but if it slips more than that, my ROAS slips, now I'm in a loss position again. And now I'm pumping money in and I'm losing money every day, and now my loss becomes greater and greater as I scale an unprofitable model.

So that's why this what-if analysis is based on a daily performance, so that you can adjust as the numbers come in. As you're watching things, as you're working with your marketing agency or you're working with your marketing team, to see what's happening, that you can adjust in real time decisions that are being made based on what's really happening.

So I hope that was helpful. And if you have any questions or want to talk to us about how to build your business with better numbers, feel free to contact us at ledgergurus.com. Also subscribe to our YouTube channel and our blog if you want more great information on how to run your business effectively.